You'd have to have been living on Mars for the past decade to not be aware that house prices, especially in Melbourne and Sydney, have risen sharply. The combination of extremely low interest rates, a growing population, and in some cases a lack of supply of new homes, has resulted in existing home owners becoming wealthy, at least on paper, and those outside the home ownership club wondering how they will ever break in.
You could rail against the unfairness of it all but that's likely to have as much impact as putting up an umbrella during a cyclone.
So how about focusing on a Plan B? How could you re-imagine your life journey, where the purchase of a home in your late 20s or early 30s, probably with a partner, is not in the plan?
Why has buying a home been seen as such a cornerstone of financial security?:
1. It provides a guaranteed place to live.
2. When you retire and have less income coming in, you have a roof over your head at little cost.
So in finding an alternative path, we need to consider how we can solve for those two objectives.
If you're renting, then there is always the chance that the landlord could ask you to leave. But put yourself in the landlord's shoes. They've bought this property, and almost certainly borrowed to do so. They want nice regular rent and no headaches. They don't want turnover of tenants, because then they have periods with no rent coming in, and they usually have to pay the managing agent to find a new tenant. Landlords are vulnerable. No rent coming in for a month, or damage to a property, and they're likely to be hurting.
So pay your rent on time and take care of the place, and the risk of you being asked to move becomes quite small. Not zero, for sure, but not highly probable. Be the tenant a landlord wants to have in their property.
Longer term financial security is certainly the stronger argument for becoming a home owner. So if it is the case that buying in the area where you want to live isn't feasible, it becomes really important that you build financial wealth in other areas.
To start with you need a savings capacity.
I worked with a client recently who will be a long-term tenant, and was having trouble making the monthly finances work. We explored various ways to solve this, but what it really boiled down to was that she was just paying too much rent given her after-tax income. We ascertained that rent was gobbling up 42 per cent of her take-home pay. And then when she paid other housing related bills such as gas and electricity, half her income was gone.
This wasn't sustainable.
So as a starting point, aim to have your rent at no more 30 per cent of your take-home (i.e. after tax) income.
What to do with those savings? You need to develop an investment strategy that works for you on all levels - risk, time frame, and ethics. Educate yourself and/or get professional help.
For the person pursuing the alternate path of non-home ownership, superannuation is likely to take on increased importance. A larger balance enables a large sustainable income to be withdrawn, covering rental costs. Or, perhaps you withdraw a lump sum from your super to buy a home.
Just because it's not viable to buy a home in the area that you wish to live, doesn't mean you are prohibited from having a stake in the residential real estate market. Could you afford to buy a property in another more affordable city, and rent that property out? You may be able to use the negative gearing provisions to help with affordability. Perhaps you could buy with a friend or family member.
It's not something that you want to build your life around, but receiving an inheritance from parents is a reality for many of us later in life. Indeed, the rising price of housing that may have priced you out of the market, may have an upside in also inflating the inheritance you one day receive.
The solution will be different for everyone. Perhaps it suits you to live inner city and rent during your peak earning years. Sure, properties cost more in Melbourne or Sydney, but wages are also higher than most other parts of the country, so there may well be a robust argument to be made that your long-term financial position is improved through you renting in the vicinity of the highest paying work.
Then later in life you move out to a rural area, or a city where you can afford to buy. Maybe the goal should be to own a home by the time you're 60. The reality is that while in recent memory, Australians have worked to a formula of buying a home asap, that doesn't have to be the only way. You need not be financially doomed if you don't buy a home in your 20s or 30s.
Paul Benson is a licensed financial planner and creator of the podcast Financial Autonomy. Pbenson.firstname.lastname@example.org